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Arun Sudhaman

Following the surprise move by the United States Federal Reserve to cut interest rates last week, the residential property market appears poised for a rebound.

After being in the doldrums for much of the past two years, the market is expected to be stimulated by the rate cut.

Hong Kong's leading developers expect lower interest rates to spark a recovery.

Eric Chow Kwok-yin, general manager of the sales department at Sun Hung Kai Properties, expressed approval and anticipated more cuts.

'We definitely see the continued trend of cutting interest rates as speeding up the recovery of the property market,' Mr Chow said.

He also expected buyers to re-enter the residential market.

'This should boost the confidence of buyers,' he said. 'There will be more activity on the buying front.'

Swire Properties senior sales manager Mabelle Ma agreed with Mr Chow.

'This will help build up the confidence of buyers,' Ms Ma said.

Neither developer expects an immediate price rise, although Ms Ma was confident for the future.

'For quality developments, we do not expect to see any more price cuts,' she said.

However, the lower end of the residential market is unlikely to see much respite, with the supply of Home Ownership Scheme (HOS) flats likely to deflate any potential price gains.

Franklin Lam, managing director and head of research for UBS Warburg, was sceptical about the likelihood of a rise in residential property prices.

'We expect no changes in property prices,' Mr Lam said.

Winnie Chiu, property analyst at DBS Securities, also expects the low end of the market to suffer from the large HOS supply.

'The low end is going to suffer from the large number of flats on the market this year,' she said. 'There will be about 45,000 flats [to be completed] in Hong Kong, representing 5 per cent of the supply in the market.'

With the prime lending rate now standing at 9 per cent after the cut of 50 basis points, a boost for luxury home prices is expected.

But the Government's recent decision to sell more than 6,300 luxury HOS properties at cut prices may yet negate the effect of the rate cuts.

The average mortgage rate, about 2.25 per cent below prime, is now at 6.75 per cent.

Banks have slashed rates in an effort to entice home buyers.

If, as expected, the Fed cuts rates by 100 more basis points by the middle of the year, the funding rate will drop to 5.75 per cent.

This would leave the rate only about 0.5 per cent higher than the residential yield.

When mortgage costs and rental yields are this close, there is not much difference in buying and selling property, and some analysts believe this will represent an excellent buying opportunity.

Anthony Wu Yai-wai, property analyst at Lehman Brothers, argued that this scenario was a boon for buyers.

'[The interest-rate cut] will effectively narrow the gap between rental and mortgage,' Mr Wu said. 'Another round of interest rate cuts, which is expected, will narrow the gap even further, which is positive for buying assets.'

Mr Lam expects a stable performance from property prices this year but sees no recovery in trading volume.

Ms Chiu expects trading volume to rise. 'However, there will be no substantial increase in property prices - unless we see some real increase in household income,' she said.

She does expect a 5 per cent rise in prices this year, but does not put that down to the interest rate cut. She believes the luxury residential market will benefit most from the cut.

'The high-end residential segment is going to benefit because they are resilient to the swing in the market rates or supply,' Ms Chiu said.

Lehman's Mr Wu did not expect the HOS to affect prices unduly.

'The HOS supply in the market will not pressure down the prices,' he said. 'Donald Tsang [the Financial Secretary] has already indicated that they will offer 20,000 flats this year.

'There will be some slippage in the construction schedule or timing of sales, so the market supply may not be as large as some other analysts have forecast.'

Mr Wu expects prices to rise in the middle of the year, when people realise the 2002 residential housing supply is likely to be insufficient.

Kingston Lee, assistant director at Schroders, took a more positive view of the effect of interest-rate cuts on the residential property market.

'Cutting interest rates is definitely good for the property market, as people will compare the cost of funding property investment with investing on the stock market,' said Mr Lee. 'Property prices are already being raised.'

Mr Lee expects new developments, in particular, to see a firming up of prices and added: 'It's a good time for people to buy.'

On the stock market, property counters reacted to news of the interest-rate cut by posting some spectacular gains. Cheung Kong and Sun Hung Kai Properties led the way, and analysts expect the rise to continue.

'Quite a few of the counters have seen pretty substantial rises,' Howard Gorges, of South China Brokerage said. 'We'll see some profit-taking [this] week but we expect prices to continue their rise.'

Franklin Lam took a more sober view of property share-price prospects.

'We expect no changes in stock and property prices,' he said. 'Fundamentals in the end will dictate a more reasonable pricing.'

Graphic: BUIL07gwz



Developers, analysts see continued rate cuts luring buyers back into the market